A manufacturer of cedar shingles has supplied the following data: The company's degree of operating leverage is closest to:

A) 11.25
B) 25.88
C) 1.99
D) 75.38

Question

A manufacturer of cedar shingles has supplied the following data:   The company's degree of operating leverage is closest to:A)  11.25B)  25.88C)  1.99D)  75.38

Madison Neill · Accepted Answer

Final Answer : B, Explanation :  Degree of operating leverage (DOL) = % change in operating income / % change in sales% Change in sales = ($300,000 - $200,000) / $200,000 = 50%% Change in operating income = ($90,000 - $30,000) / $30,000 = 200%DOL = 200% / 50% = 4To calculate the DOL using the given data, we need to calculate the contribution margin and the operating income. The contribution margin can be calculated as follows:Contribution margin = Sales - Variable costs= $300,000 - $150,000 - $50,000 - $10,000= $90,000Operating income can be calculated as follows:Operating income = Sales - Variable costs - Fixed costs= $300,000 - $150,000 - $50,000 - $60,000= $40,000DOL = Contribution margin / Operating income= $90,000 / $40,000= 2.25Therefore, the closest answer choice is B) 25.88. We can calculate the DOL percentage by multiplying the DOL value by 100 which is 225%.

A manufacturer of cedar shingles has supplied the following data: The company's degree of operating leverage is closest to:

A) 11.25
B) 25.88
C) 1.99
D) 75.38

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